Defined Contributions Will Point Employees Toward 'Health Marts'

Companies will want to distance themselves from insurance entanglements, giving employees little option but to become more involved. Meanwhile, stormy seas ahead for Medicare+Choice.

What's going to happen in employer-provided health insurance in the first part of the next millennium will be a radical shift from what is now essentially a defined-benefit scheme — where the employer basically pays 80 percent of whatever an employee picks — toward a defined-contribution system.

The employer will say to employees, "Look, we are in the business of making widgets. We're willing to make a contribution to your health insurance but, in the end, it's your responsibility. So, we'll give you a defined contribution and we'll help you get information on insurance options available and you pick them yourself."

There will be all types of insurance products with different premiums. The dividing line will be gatekeeper vs. nongatekeeper. Nongatekeeper models — PPOs, some point-of-service plans — will be more expensive. The employer is likely to pay the contribution to make a tightly managed care gatekeeper policy affordable.

Employers will say, "We'll cover roughly 80 or 90 percent of an HMO product, but if you want all this choice, you pay for it." Which means that, ultimately, employees who are fussy will pay a much higher percentage of their premiums as a visible deduction from their paychecks.

Health marts

The second thing employers will do is organize health marts for employees, as the largest companies already do. These will be farmers markets for health insurance in which competing health plans will bid on a standard package so that employees can compare rival health plans fairly. The employer will get information on quality with NCQA data, or other data, so that employees have some notion about patient satisfaction with the plan and with providers in the plan.

Community rating will be an issue. Employers now pretty much community rate within their own companies — that is, the contributions employees make out of pocket to the premiums paid by employers do not vary by the age or health status of the individual employee. Healthy young employees cross-subsidize sicker or older employees. This intra-company socialized medicine is something employers are likely to try to continue to offer their employees.

However, employers will not try to make, say, all employees in a state (of whatever company) pay the same premiums. Companies with young, healthy employees would never go along with that.

Of course, what's been discussed so far applies mostly to big employers. Small businesses have the handicap of being prevented by statute from forming consortiums for the purpose of purchasing insurance. I'm astounded that such laws exist. My hunch is that they will be abolished so that small employers can also develop health marts.

Perhaps employers will also play along with another innovation that is badly needed in a competitive health insurance market. Serve enough wine to a bunch of HMO executives and they will tell you that the best strategy in the HMO business is to become third best in the treatment of particular chronic illnesses — not the best. If you are known to be the best, you are likely to attract people with those chronic illnesses, but your premiums won't be adjusted accordingly.

This problem could be solved — and the search for truly best quality would get new life — if the premiums paid health plans by employers were to reflect better the actuarial risk of the enrolled. A badly needed innovation in employer-provided health insurance is a system that:

(A) Continues to socialize the cost of health care within the company, so that healthy employees keep cross-subsidizing sick employees, and yet

Medicare risk rating

The government is moving down this road. A new risk-rating methodology devised by the Health Care Financing Administration for Medicare+ Choice is slated to be implemented Jan. 1. From the HMO industry's perspective, there are problems. When HCFA calculated what risk rating would do for Medicare+Choice, it found that most of the HMOs that are now in business with Medicare would wind up taking a huge hit.

That's because, so far, HMOs have benefited by having slightly healthier Medicare members. That's how they made money on the Medicare population; it wasn't from managing care better. That's why the HMOs could offer better benefits, such as pharmacy.

However, with risk rating, that favorable selection margin isn't in there anymore and the HMOs will find that they can make money off the Medicare population only if they actually learn how to manage health care better.

They can do this. A good HMO in Florida can easily shave 20 percent of health spending off the system without in any way harming patients. Any expert will tell you that, in theory, that should be possible. However, the minute the HMOs try it, there would be uproar among patients rights groups. Gray power is going to get into action, egged on, of course, by doctors who do not like to be managed by HMOs.

Being told "no"

Let's face it: Employed people take just about anything shoved down their throats, but even they insisted on the Patients Bill of Rights. The elderly have never experienced being told "no," nor have their doctors.

The other thing HMOs are up against is the fact that Medicare pays out 98 cents of every dollar it collects to the provider. The administrative load is only 2 percent. There is no HMO that could ever take a million elderly and administer their care for 2 cents on the dollar. They need at least 15 percent off the top. Where would they get the 15 percent?

Well, presumably by managing care better. But when you ask an HMO executive what does managing care mean, he'll say it means offering fewer services and paying lower fees for them.

As John E. Wennberg, M.D., vividly shows in the Dartmouth Atlas of Health Care, there is a great deal of excess use in Medicare in certain areas. However, Medicare pays very low rates. HMOs couldn't match them. There isn't a lot of money to be made by bargaining fees below Medicare.

The only option HMOs have is to deliver fewer services to the elderly. This approach would have to save enough money to cover the 15 percent administrative costs that Medicare doesn't have, as well as a prescription benefit that's the big come-on for Medicare+Choice.

Another alternative is for Congress to put more money on the table and raise the HMOs' premiums, but that's not going to happen either.

The final alternative is to get the elderly to pay more out-of-pocket. Let's see someone try that.

Uwe Reinhardt, Ph.D., is the James Madison Professor of Political Economics at Princeton University.